Still On Course For QE Tapering

Despite recent dovish talk from Chairman Bernanke, the Fed remains on course to taper down the size of its asset purchase program before year-end. Modest US growth in the first half of 2013 is expected to be followed by a pick-up in economic momentum in the second half, providing added lift to a labour market that’s already on an upswing, and leaving the door open for the Fed to curb its balance sheet starting in Q4. With a winding down of debasement policies in the cards, the US dollar has room to recapture some of the ground it lost recently. Other major currencies, particularly those whose central banks remain in easing mode, are unlikely to be spared. The Bank of Japan is steadfast in its ambitious asset purchase program, a stance that was no doubt reinforced by a government that now fully controls parliament. We continue to expect USDJPY to depreciate to around 110 by the end of next year. The European Central Bank has committed to maintain its policy rate low or lower for an extended period, while the Bank of England signalled a leaning towards forward rate guidance as a way of controlling expectations along the yield curve. Those, coupled with Fed tapering, should keep downward pressure on the pound and the euro. The only adjustment we’ve made this month is to our AUDUSD targets to reflect the recent sharper-than-expected currency slump down under.

Higher rate expectations along with a reduction of net short positions helped the Canadian dollar regain its footing a bit in July. But those expectations could be pared back if, as we expect, Q3 Canadian data falls short of the high bar set for the quarter by the Bank of Canada in its latest Monetary Policy Report. We are keeping unchanged our USDCAD targets, expecting depreciation towards 1.06 before year end.

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